Euro edging towards year highs, GBP lagging

Contrary to most expectations at the beginning of this week EUR has managed to claw back its losses and more, with the currency edging towards its year-to-date highs around 1.3069. The resilience of the currency to bad news in Europe has been impressive and its gains have reflected a speculative market that has been extremely short. The end of the week sees no key data of note so markets will have to contend with digesting the outcome of the relatively positive Spanish and French debt auctions while keeping one eye on Greek debt talks with private investors.

Unless there is yet another breakdown of talks in Greece the EUR will end the week on a positive note. I suspect it won’t last further out especially given the pitfalls ahead but at a time when investors have become increasingly bearish on the EUR it may just extend its bounce over the short term. One country to watch is Portugal whose bonds have underperformed recently as markets speculate that it could be the next contender for any debt writedown.

Retail sales data in the UK will capture local market attention today. Sales are set to have bounced back in December but the improvement is likely to be short-lived, suggesting any support to GBP will be fleeting. GBP has underperformed even against the firmer EUR recently but this is providing better levels for investors to take long positions versus EUR. In part this reflects the move in relative European/US interest rate differentials, which has been correlated with the move in EUR/GBP.

I expect GBP to outperform EUR over coming months to around 0.80, with the former continuing to benefit from the simple fact that it is not in the Eurozone and has therefore acquired a quasi safe haven status. Nonetheless, as reflected in the drop in Nationwide consumer confidence in December, this year will be particularly difficult for the UK economy. GBP will be restrained by the prospects of more quantitative easing by the Bank of England as inflation eases further


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